Ask the grumpies: if I want to give my kids a huge amount of money as young adults, how should I do it?

January 5, 2018 — nicoleandmaggie

Sandy L asks

Should I buy my kid a house or pay for tuition?

Student loans can be deferred etc. if the kid is paying their own way they may be more serious etc.

Tuition. The pay your own way thing is BS. Here’s our deliberately controversial post on that topic. You can compromise by having them pay their own extras (clothing, meals out, etc). Then they’ll have the same experience of learning how to budget and not living high on the hog but without the huge amounts of debt at the end. Also, note that if you’re paying tuition directly, it isn’t subject to the gift tax. “Under current IRS rules, a payment made directly to an educational institution to pay for the tuition of a student does not count as a gift to the student for gift tax purposes, ” according to fastweb.

Buying a child a house could lock the kid in place and create additional expenses. A house is a lot of responsibility when you’re just starting out, and trying to deal with selling and repairs on top of job searching and dating and hobbies and anything else that young people do might be more hassle than help. (And if the kid decides to sell the house in order to pay off hir education, basically you’ve just given realtors a bunch of transaction fees and paid gift taxes for nothing.) If you’re only talking about providing a downpayment, that’s even worse because a mortgage is a big fixed expense and the kid might not be able to sell very easily if the house goes underwater and they get a job elsewhere.

17 Responses to “Ask the grumpies: if I want to give my kids a huge amount of money as young adults, how should I do it?”

My cousin received 2 apartment buildings filled with paying tenensts as wedding present to get himself on his feet. He never held a steady job since and the apartments went to hell. Easy come easy go.

To clarify, I am generally not a fan of giving family members, even children large handouts, with the exception of maybe education. Handouts lead to entitlement which leads to leaching off parents. At least it has with every instance I have seen.

I mainly was wondering if there is a better use of $300-$400K. People still pay these astronomical amounts for education but at some point the ROI won’t make sense anymore.

What if you used that money to start a business that your family members could work at for example. I work in manufacturing and there are many small family businesses in my sector that provide good jobs for family and friends in an area where manufacturing jobs are now scarce.

Even something more low tech like a contractor or landscaper. $400K buys a lot of tools and trucks and equipment. Even if it’s $100K or $80k. You can get a lot of business equipment for that or buy a Dunkin’ Donuts or whatever. For example, I recently had lunch with a colleague. He’s an immigrant went to MS in engineering school and an mba. He was always considered the smart one in his family because he is highly educated and worked at big companies. . All his cousins started businesses….Convenience stores, donut shops, gas stations. Now, 20 years later They are all millionaires. . He is not. He said to me the other day after another company reorganization he was not happy with: Who’s the smart one now?

I know this is a very contrarian opinion to be posted on a university professors blog but There are other things you can do with money that also have value. Learning is one of the most important things In life. I just question whether it’s worth spending the hundreds of thousands of extra cash on a top school. Part of me says yes, because it buys a great network and foot in door, but the other part says extra cash can have more value if you have an entrepreneurial spirit.

I used those examples specifically to highlight that you don’t have to be a tech genius to become an entrepreneur and also to show that the most prestigious of professions aren’t always the most lucrative choices.

For me, It’s okay to value different things in your career choice as long as you can make enough to stand on your own 2 feet. Not everyone cares about prestige or money but don’t come looking for handouts when you can’t live within your means.

The cold hard truth is that right now, most people need post-secondary education (including technical degrees) to have any chance of making it into the middle class. People doing well with just high school diplomas are increasingly exceptions. This is one of the big things in economics right now with widening economic inequality, and the current government is pushing away from more education rather than towards it.

My parents paid for about half my college tuition and room-and-board; the rest was scholarships and loans (small loans!), and I had a cash amount I had to contribute each year from working in the summers, and I was responsible for everything at college, like toothpaste and going-out-to-dinner money and so on. My mother paid off my remaining $4000 of loan as a graduation present. I definitely learned to budget! I also had to keep a 3.5 GPA every semester to keep my scholarship so it was very motivational. I graduated with about $4000 in cash, which is not so bad. My parents made it very clear that once I graduated, I was on my own, and so I needed to have a plan to support myself after college. On the whole I think it was a pretty good way to foster independence without making me responsible for a crushing burden of debt. We plan to do more or less the same with our kids (though, if we’re still here, there’s 90% tuition remission within the conference and 50% everywhere else…. classic golden handcuffs).

The spouse paid off his student loans just before we got married, and it was a big benefit to not be in debt at all (mortgages aside).

My parents always had the opinion that school was my job. I wasn’t encouraged to work during high school but did accumulate a good number of college credit hours through AP courses, concurrent enrollment and summer programs. They would have paid my way through college, but I got a full-ride scholarship to the local university and lived at home, then went to graduate school in the sciences where my tuition was covered and I was paid a stipend. They ended up helping my husband a bit with medical school expenses because they had money that had been earmarked for me but not used.

On the other hand, my husband was a paperboy early on and worked through high school and college. His parents encouraged him to join the national guard to take advantage of the GI bill and also talked him into getting some early credits done at the local community college to save money. Although it worked out for him, I’m not sure there was much benefit in the long run because tuition was pretty low at our state school and the community college courses were not as rigorous and he ended up having to take one of them over again.

Overall, I subscribe to my parents’ philosophy (and so does my husband). All of my siblings went on to earn graduate degrees while only half of his siblings did. It is difficult to generalize, different families/personalities might respond better to different approaches. But I agree that higher education is the way to go, and I am very concerned about the anti-university, anti-education sentiment in the country these days.

I’m paying the full amount of tuition for my son’s college (through his MS, though I’d pay for a PhD if he wanted one—we saved enough in his 529 plan for private college, but he went to UCSB). I don’t think that young people should start their adult lives in debt, and I deplore governments’ abandonment of state-supported education.

My son is in a field where employment is good (computer science), and he’s been the CTO of a small startup throughout his undergrad years (they started the company while in high school). I don’t know exactly how well the company is doing, but they are still in business after over 3 years, have developed and sold 4 different products (plus carrying a few products from other companies), and are probably doing over $100k a year in revenue. They boot-strapped the company without debt (well, maybe $4000 from the other founder’s parents, paid back in the first 6 months).

If my son needs investment in a new startup, I’m likely to be willing to back him, but he’s currently looking for summer internships, to see how he likes working for someone else—he’s already familiar with what working for his own startup is like,

Do not buy them a house as explained above.
IF you can: pay tuition, books, basic housing costs ~ not more.
Save money for your own retirement and senior health care so you do not become dependent on your children if possible.
Be very very careful about loans and who is obligated to pay them off at what rate and at which point in time.
Look carefully at how long it will take to graduate at any institution as that totally impacts costs…. some schools now assume the majority of their students will take 5-6 years! This is a huge change in norms in the past 20 years and many parents and students do not know it has happened.
PS: I am hearing that doing “2 years in Communityy College and transferring to a 4 year college for the last 2 years” often leads to 3 or 4 years in Community College and the same in the ‘4 year college’. Be very careful and get current data.

I find the 4 year thing to be a major benefit of small, liberal-arts schools. My husband and I both went to ones that literally stopped giving aid after four years. They wanted you out. We both taught at a mid-level state school and were shocked to realize how many students were still there after 5, 6, or 7 years. Holy cow! Seven years at my undergrad would have netted me two more majors.

I have friends who did the CC thing (back in the day . . . 17 or so years ago when I was in college), and it only worked out okay for some of them. Most of them stopped going. I think there’s utility to CCs, but I’d encourage motivated students to go straight to college. Lots of benefits to being at the same institution for four years and really getting to know the teachers, take advantage of opportunities, etc.

Depends how much money you can spend, and the specifics of the situation.
My Mom’s parents were in the enviable position of being able to cover tuition, living expenses, and discretionary expenses. My Mom took the allowance and spent it all on books. She “learned to budget”, provided you think of books as a legitimate substitute for clothing.

If the kid is responsible, they’ll do well with home ownership or college. A few people are responsible for studying but not maintenance, or vice versa, but I suspect a substantial correlation. If the kid is not responsible, you have to consider whether it’s harder to crawl back from flunking out or bankruptcy. Speaking to people who have come back from both, I’d say in a state with good community colleges it’s probably easier to get over flunking out.

If you’re committed to covering living expenses and tuition during college, you can sometimes get a two-fer. Sometimes you can buy a rental place and let your kid live there for free. Then when they graduate, you sell the rental and give them that as a nest egg to invest or use as a downpayment. If you don’t have enough money to cover that, or the real estate market of the college location makes it impractical, it’s probably ideal to let financial aid cover as much as it can, encourage your student to take out subsidized loans, and then pay them off upon graduation (if debt levels get much higher than ~28k, it could be better to pay it as the tuition is billed, because you’ll have to worry about gift tax. But if the student only has to take on the currently average debt load of ~28k, then you can pay off ~14k each tax year and they won’t pay an appreciable amount of interest)

Outside of that scenario, I don’t see myself paying for my kids homes. I’d rather pay for them to backpack around Europe for a year, or make a go of it with an Etsy shop or something. I would pay for college though.

Re: starting at community colleges- In recent years, more states have adopted articulation agreements, so the number of students ending up spending money on dramatically more classes because of non-transferability or transferability only as “elective credit” (“where credits go to die”) is probably lower than it used to be. There are also MANY students who take longer than 2 years at CC and 2 years at uni because they want to go part time at the CC.
That said, I feel like some programs (bioengineering, I’m looking at you) have developed programs of study that are exceptionally challenging to actually complete inside of 4 years, such that if even if you have an articulation initiative you probably can’t do 2 + 2 for a particular major.
Also, very few community college students come in ready to go on calculus, and that sets them way back for STEM majors.

Pay for college! My mom paid my tuition. Best gift ever. I still had to get scholarships, and I ended up taking on $1k more each year (through scholarships) plus funding extra things I wanted to do. It was so freeing to graduate and be able to explore. I did a lot of low paid internships that really helped me solidify what I enjoy doing. I didn’t work any less hard for having my tuition paid, although I suppose your mileage may vary here. You know your kid the best.

We talked about buying me a house when I went to grad school (especially so I could rent rooms out to other students). I’m so glad I didn’t — friends of mine did and definitely ended up having issues either selling or dealing with having to rent out rooms/space when they left. I left grad school after two years, so it would have been a poor investment. I really valued my mobility in my 20s.

My parents — who have done well, starting out with essentially nothing, and building a sizable income into a small fortune — have funded college accounts for all their grandchildren. So they’re funding my kid’s university tuition, room, and (some) of the expenses. We’re paying for books and providing the rest of the expenses. We provide this expense money up front each month, and the kid has to figure out how to budget. Last semester this left them short a few months — they didn’t go hungry, since they had the meal card, but there was no money for lunches off campus, or to buy extras. They’re learning!

If my parents had bought me a house vs paying for college, I would have been trapped in South Georgia for a long, long time. And I would have been furious and resentful for that entire time. Don’t do that unless you are 100% positive that your kid wants to live wherever you buy that house for at least ten years. And you cannot be 100% positive. Neither can they. The years between 18 and 28 are – in most cases – years in which a person’s wants and needs can change drastically. If they don’t have the freedom to be mobile, that is a recipe for misery.

My parents offered me and my sister the same deal: the new car of our choice paid for at graduation, if we went to the home-town school and lived at home. My sister got a partial scholarship to a women’s college the next state over, and chose that. She got a car (because doing without was not an option) but not new, and not the car of her choice. :-) I’d won a full-tuition scholarship to the home-town school, and opted to take it vs going out of state. I got the car of my choice a year early – and senior year in an apartment; they claimed they wanted to renovate my room, but I think they were just ready to get me out of the house. I got two trips to New York City during college as well (imagine going from a small South Georgia town to NYC …!). We each got a summer in Europe to study. Fantastically formative.